CMBS Special Servicing Volume Dips in August

The volume of loans in the hands of the CMBS industry’s 17 special servicers declined last month, after increasing for two straight months, and now stands at $40.6 billion, according to Morningstar Credit Ratings.

The decline was driven by the $994 million of liquidations that took place during the month. According to the Horsham, Pa., rating agency, 2,246 loans are now in special servicing. That compares with 2,288 loans, with a balance of $41.1 billion, that were in special servicing in July.

Because the universe of CMBS tracked by Morningstar declined to $621.5 billion from $627.8 billion, the percentage of loans in special servicing remained flat in August, at 6.54 percent.

CWCapital Asset Management, the most-active special servicer, saw the volume of loans it handles shrink by some $340 million, while LNR Partners saw its volume shrink by $230 million. And C-III Asset Management saw a $90 million increase. Most other servicers saw much smaller changes in the volume of loans they handle.

While loans continued to get pushed to special servicing, most had balances of less than $75 million. The biggest to transfer last month was the $69.7 million mortgage against the Indian River Mall & Commons, a 434,577-square-foot retail property in Vero Beach, Fla., that’s owned by an affiliate of Simon Property Group. The loan is securitized through Banc of America Commercial Mortgage Trust, 2005-1, and was transferred to C-III because it’s expected to default upon its November maturity.

C-III also is handling the biggest large-balance loan to be transferred to special servicing in recent weeks: a $122.6 million mortgage against a portfolio of 936,320 sf of office space owned by Investors Real Estate Trust. The Minot, N.D., REIT said it was considering surrendering the portfolio in a deed-inlieu of foreclosure because it’s not likely to be able to refinance the loan when it matures in 2016. The loan, commonly referred to as the IRET Portfolio, was transferred to C-III in late July.

CMBS Late-Pays Could Drop Below 4% This Year

NEW YORK CITY-The delinquency for CMBS in the US could fall below 4% by year’s end, about half the late-pay rate seen at the start of 2013 and the lowest since October 2009, says Fitch Ratings. That’s provided the pace of resolutions continues and new issuance remain strong, in proportion with portfolio runoff.

Further, locally based Fitch assumes resolutions for loans less than $100 million would remain at their 2013 pace, while resolution timing for loans greater than $100 million will be considered on a case-by-case basis. The expected 4% mark also assumes that the $3-billion loan on the Peter Cooper Village/Stuyvesant Town multifamily complex in Manhattan’s Midtown South will not be resolved this year.

CWCapital, the servicer on the Stuy-Town loan, is expected to market the asset in mid-2014. Given the size of the asset, lining up a buyer and the complexities of bringing a sale to completion, Fitch is assuming that it may not occur until 2015. If a ‘14 resolution did occur, the delinquency rate overall could fall to below 3.5% by year’s end.

Even without a resolution to the Stuy-Town loan, though, Fitch cites several key factors as likely contributors to a drop in CMBS delinquencies this year. Notably, the CWCapital bulk asset sales, first announced this past October, could shave the delinquency rate by roughly 50 basis points lower within just the next couple of months.

In addition, the inventory of REO assets has grown to over 50% of all delinquent loans now tracked by Fitch. As these assets are sold off, the late-pay rate will decline sharply.

Finally, the volume of Fitch-rated loans maturing in ‘14 will be relatively small, at less than $20 billion, consisting mostly of loans originated in 2004 and 2005 with coupons over 5.5%. This should result in only a modest number of new maturity defaults, although the approximately $3.3 billion in Fitch-rated, seven-year loans originated in 2007 will be monitored closely.

By property type, hotels could potentially see the largest drop in delinquencies this year, according to Fitch. Relative to the size of its universe, lodging has a disproportionately large share of REO assets valued at more than $100 million. Most of those assets are expected to be sold in ’14, which could send the hotel late-pay rate down almost four percentage points to around 3% by year end.

Delinquency rates for the other major property types are expected to fall by around two percentage points each this year. However, the multifamily late-pay rate stands to see a nearly 5.5-percentage point drop should the Stuy-Town loan be resolved by the end of '14.

Troubled CMBS Debt to Get Permanent Homes

Summary:  CWCapital Asset Management LLC, a loan servicer, is eager to unload troubled mortgages from their book.  It would seem they fear on missing out on an easy lending environment (rising property values, low interest rates).

--(WSJ Blog)--

Firms overseeing troubled commercial real estate mortgages may suddenly be in a hurry to sell the debt after years of trying to find a better solution for investors.

The $2.57 billion sale of mortgage loans and commercial properties from CWCapital Asset Management LLC in coming months suggests the loan servicing firm may want to take advantage of rising prices and investor demand before they fade, perhaps at the hands of higher interest rates, said Harris Trifon, head of commercial and asset-backed bond research at Deutsche Bank.

The Moody’s/RCA national all-property composite index has increased 42.1% from the trough in December 2009 to July this year, a period largely accompanied by falling interest rates. Lower interest rates can make buildings more valuable because it takes less revenue to support debt.

“Values (of commercial properties) have increased throughout the year, especially for core central business district markets, Mr. Trifon said. Rising interest rates, such as the jump seen in May and June, are “not going to be conducive to higher property values,” meantime, he added.

In aggregate, the sale of mostly office properties is the largest of its kind and only the third that has exceeded $1 billion in the last few years, Mr. Trifon says.

The source of such sales has already been declining as CWCapital and other “special servicers” have made significant headway in resolving loans in properties overburdened with debt. In September, about $53 billion of loans sat with the servicers, down from the peak of nearly $90 billion in late 2010, according to Trepp, a CMBS data provider.

CWCapital decided to sell the portfolio based on its recent transactions, and to capitalize on improvements in debt funding as well as the real estate recovery, David Iannarone, CWCapital’s president, said in a statement.

Some of the buildings in the CWCapital portfolio may have been held in a distressed state for years as the servicer sought ways to reduce losses to bondholders. A sale too soon could mean a fire-sale price, but fees and other expenses to bondholders can rack up as a defaulted loan goes unresolved.

CWCapital won’t publicly identify the properties, but the list probably includes some of the most storied commercial real estate assets financed at the peak of the real estate boom, Mr. Trifon says. Among them could be Two California Plaza, a Los Angeles office tower dogged by low occupancy and part of one of the largest commercial mortgage-backed securities ever sold.

As the default specialist, CWCapital began servicing the building’s $470 million loan in December of 2010, and foreclosed on behalf of investors a year ago, according to servicing notes posted on Trepp’s website. A January appraisal put the building value at $343 million, about 54% of the estimate when the loan was packaged into CMBS in 2007.

In addition to losses dealt to riskier slices of the bond, senior investors may also take a hit, warned Mr. Trifon. That’s because principal is repaid to the senior bondholders at face value, below the current premium price that accounts for the bond’s higher interest rate.